Tabell’s Market Letter – April 19, 1973

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON. NEW JERSEY 08540 DIVISION OF MEMBER NEW VORK STOCK EXCHANGE. INC MEMBER AMERICAN STOCK EXCHANGE April 19, 1973 We recently concluded a series of four of these letters in which we discussed some of the ramifications of the theory of growth stock investment. We should like, in this issue, to draw a few tentative conclusions based on that examination and to offer a few of our own thoughts on investment philosophy for the 1970's. There is, of course, nothing new under the sun. The following quotation is an appropriate summary of what we have, in our series, indicated was taking place overthe pastfew years. Selectivity took ana new character by reason of the overshadowing emphasis placed on expected future growth as the prime criterion of an attractive investment. There was nothing wrong with these … ideas, except that it was almost im- possible not to carry them too far. With encouragement from the past and a rosy prospect in the future, the buyers of 'growth stocks' were certain to lose their sense of proportion and to pay excessive prices. The above is not Anthony Tabell writing in 1973 about 1971-72. It is Benjamin Graham writing in 1951 about 1928-29. As readers may have gathered from our previous letters, we find ourselves, on this issue at least, comfortably in Dr. Graham'S camp. But, if mindless projection of growth rates is not the simple key to investment success, what is an alternative philosophy We offer herewith three principles 1) Two and two make four. 2) There are no one-decision stocks. 3) Investor confidence varies more than earnings. Let us examine some of the implications of these three suggestions. It was Bernard Baruch who first suggested that in periods of market optimism it was necessary to repeat to oneself that two and two were four. We are, in other words, willing to accept the intuitive conclusion that, when large numbers of buyers are agreed that a given method of investment is a sure road to suc- cess, that method cannot prove viable over the long term. The enforcement of this principle is the function of the marketpla'Oe, and it is our belief that the market will be no less (OffIclent in thi s task in the future than it has been in the past. It should be made clear that what is being said here lmplies no cntlCism whatever of the fundamental merits of recognized growth issues, suggests that they should not sell at some premium over other issues or affirms that they cannot under any circumstances be attractive purchase candidates. What we are suggesting, along with Graham, is that the concept that such issues represent appropriate investment vehicles for conservative accounts, regardless of the price being paid, is, to put it mildly, ludicrous. Secondly, we think the suggestion that tnere exists a class of one-decision stocks, where all that is necessary is to buy and hold, constitutes a abdicatic of the investment manager's responsibility. Were the investment manager perfect, his initial selections for purchase would, of course, be only those stocks which were going to provide the maximum long-term rate of return, and these could be held effec- tively indefinitely. Investment managers, however, are far from perfect. Each initial purchase memorial- izes the manager continually to decide whether to hold or not to hold, depending upon whether the original expectations are being fulfilled and to what extent the market price discounts these expectations. Finally, as we have pointed out, the biggest factor in price change, over relatively long periods of time, tends to be caused not by earnings but by investor confidence in those earnings — this confidence being most readily express ed by the statistic of the price/earnings ratio for individual stocks. This fact has two implications. The first provides the reason for our conviction, which will surprise no one, that technical analysis is an indispensible factor in the investment decision-making process. It is equally important in evaluating common stocks to have some idea of what the market is likely to pay for future earning power as it is to forecast what that earning power is gomg to be. Technical work, we think, is a most useful guide in making such a projection. The second implication of investor confidence variability is that price level, in relation to earnings and in turn to comparable valuation of other stocks,must be a prime criteria in investment selection. It is axiomatic that a stock having a low multiple, thus suggesting low investor confidence, ha s more potential on the upside should investor confidence increase and less risk on the downside should it continue to deteriorate. Willingness to ignore the price being paid, even in companies of the most pristine quality, involves,in our view, another abdication of the investment manager's responsibility by reason of the assumption of unneccessary risk. It may be suggested, of course, that recent markets have hardly tended to prove the soundness of these tenets vis-a-vis the Simple-minded growth approach and, indeed, may even have suggested the opposite conclusion. We continue to believe, however, that the principles above represent viable gUlde- posts to a successful investment philosophy. Dow-Jones Industrials 963.35 ANTHONY W. TABELL S&P Compo 112.17 DELAFIELD, HARVEY, TABELL AWTrk No statement or expression of opInion or ony otner motter herein contolned IS, or IS 10 be deemed 10 be, directly or indirectly, on offer or the sollcltotlon of on offer to buy or sell ony secunty referred 10 or mentioned The ma!!er IS presented merely for the converlenCl; of the subscriber While we believe Ihe sources of our Information to be reliable, we In no way represent or guarantee the aurocy thereof nor of the statements mude herein Any action to be Token by the subscriber 'hould be based on hiS awn inVestigation and infOrmation Jonrey Montgomery Scolt, Inc, as a corporation, and Its officers or employee may now have, or may later toke, positions or trades In respect to ony ,ecufltle, mentioned In thiS or any future Issue, and such position may be dIfferent from any Ylews now or hereafter e'pressed In thl or any other sue Janney Montgomery Scott, Inc, which IS registered With the SEC 0 on onyeslmenl adYlsor, may glYe odYlce to Its Inyestment odYIKHy and othel customers Independently of ony statements mode In thiS or In af'ly other Issue Further If'lformotion on any security menllof'led herein IS aVailable on request ——.,